Why Edward Conard Is Wrong About Income Inequality

Edward Conard has gotten a lot of press lately for writing a book that praises income inequality. Writing in the New York Times Magazine, Adam Davidson described Conard's argument this way: "If we had a little more of it, then everyone, particularly the 99 percent, would be better off." Conard is a former partner at Mitt Romney's private equity firm, Bain Capital, and a major contributor to Romney's presidential campaign. That gives readers of Unintended Consequences: Why Everything You've Been Told About The Economy Is Wrong the thrill of being privy to opinions Romney may well share but dare not say out loud.

So the biggest surprise, on opening Unintended Consequences, lies in discovering that this book isn't about income inequality at all. It's basically a defense of the investment class, whom Conard is anxious to absolve from all blame for the subprime crash of 2008. There's quite a lot in the book about banks and regulators and taxes, but not very much about the middle class, the logical focus of any serious discussion of the 33-year run-up in income inequality. And while it's true that Conard believes America needs to shovel more cash to the rich so they'll do the rest of us the great favor of investing it, only at the end does he flesh out, in a chapter titled "Redistributing Income," why he thinks redistribution is a lousy idea.

It feels a little unfair for me to write a column explaining what Conard doesn't understand income inequality in America, because it's a topic he never fully engages -- not even in the "Redistributing Income" chapter, which is mainly an argument against providing government benefits to the poor. On the other hand, income inequality is the subject about which Conard is talking as he travels the country marketing his book, because it's a central issue in the presidential campaign. That makes it hard to ignore the hasty and ill-informed arguments he makes about inequality in Unintended Consequences.

As I explain in my own recent book, The Great Divergence: America's Growing Inequality Crisis And What We Can Do About It (Bloomsbury), from the early 1930s through the late 1970s incomes in the United States either grew more equal or remained relatively stable in their distribution. Then, starting in 1979, incomes grew more unequal. Middle class incomes stagnated relative to their growth in the postwar era and also relative to productivity (i.e., output per man- or woman-hours worked), which had dwindled during the 1970s but grew starting in the 1980s and took off like a rocket in the aughts. Meanwhile, incomes for the affluent, which had grown at about the same rate during the postwar years as incomes for the middle class, started growing much faster, and incomes for the super-rich started growing much, much faster. (Incomes for the poor actually came up slightly over this 33-year period, but dropped precipitously when the recession hit.)

The Great Divergence is actually two divergences. There's a skills-based divergence between people whose education ended with high school and people who went on to get college (and, increasingly, graduate) degrees. And there's the divergence between the top 1 percent (especially the top 0.1 and 0.01 percent) and everyone else. Policy wonks sometimes argue over which of these divergences is more important, but looking back over 33 years it's clear that both have been extremely important.

The skills-based divergence is the more complex of the two. One factor is a shortage of skilled labor relative to the growing demand, reflected in the fact that during the 1970s America's high school graduation rate stopped climbing even as the computerization of the workplace increased skill demands. Another is the precipitous decline of the labor movement, which has been much greater than in other comparable countries because of anti-labor U.S. government policies. Another is a variety of other things the government did, including the setting of interest rates, raising or not raising the minimum wage, changes in taxes and benefit programs, etc. (Interestingly, tax policy didn't loom nearly so large as you might suspect.) Trade played a growing role, but it wasn't a major factor until the early aughts, when China emerged as a principal trade partner.

The 1 percent versus 99 percent divergence is much easier to explain. Compensation for top executives at nonfinancial firms became unhinged from economic reality, and the under-regulated finance industry ate the economy.

A key question about both kinds of inequality is why they are growing today when they didn't for most of the 20th century. Obviously part of the answer is that the Great Depression and World War II were national crises that disrupted the accumulation of wealth that had occurred during the 1920s. But that doesn't explain why incomes failed to grow more unequal from the late 1940s through the early 1970s, when the postwar economy prospered. Conard's answer is that "World War II destroyed Europe's and Japan's infrastructure. This weakened their ability to compete with the United States, and it took decades for these advanced economies to catch up." That's true, but only up to a point. Europe and Japan actually recovered from the war pretty quickly, thanks in part to the Marshall Plan. Meanwhile, these other countries were experiencing the same trend toward greater income equality observed in the U.S. More equal incomes weren't just America's prize for being king of the hill.

During the Great Divergence, Conard argues, growing immigration put downward pressure on wages. The timing works; immigration law was dramatically liberalized in 1965. But the education level of most of these immigrants was so low that economic studies have failed to demonstrate that expanded immigration affected incomes for any native-born group except high-school dropouts. When it comes to middle-class wages, which is what the Great Divergence is mostly about, immigration has had no notable effect.

Further downward wage pressure, Conard opines, came when "baby boomers and women flooded the workforce." But baby boomers are now well into middle and even old age. Some of them are now retiring. Yet the inequality trend marches on. Women's role is actually pretty murky. Although more women entered the workforce in the 1980s, there had always been a lot of women who worked. The more notable change was that women started getting better jobs, which should have resulted in greater income equality. To be sure, some of these jobs might otherwise have gone to men. But women didn't penetrate male-dominated Rust Belt industries very far, and it was these industries' decline that proved especially devastating to the middle class.

The most baffling and distressing aspect of the Great Divergence was the decoupling of median income from increases in productivity. Why should we throw money at the investment class, as Conard demands, if there's no benefit to the middle class commensurate with the prosperity that results? During the past decade median income has actually declined slightly while productivity has increased briskly. How does that even happen?

Conard says the puzzle is simple to resolve. The U.S. employs a larger proportion of its population than the European countries with which we are often compared, unfavorably, with regard to income distribution. We employ near-retirees, female part-time workers, young Latino immigrants, etc. "Obviously this group has lower productivity than the average U.S. worker," Conard writes. It isn't so obvious to me. In my experience female part-time workers are more productive than full-time workers, not less; most of the ones I know end up doing as much work as their full-time counterparts in half the time (and for half the pay). Near-retirees today are so robust that many people -- especially conservatives -- think we should raise the Social Security retirement age. Granted, unschooled immigrants lack education, and therefore are limited in the economic value they can contribute to the economy. But I wouldn't exactly call them unproductive. They work like demons.

More to the point, the U.S. has always employed near-retirees, female part-time workers, and at least some low-wage immigrants. Why would these "lower productivity" workers drag wages down today when they didn't during the 1960s? A much simpler and more logical explanation for why workers receive less economic benefit from their productivity is that organized labor is on the ropes.

The decline of labor likely also helps explain the rise of the top 1 percent, whose share of the nation's income has doubled during the Great Divergence. Broadly speaking, the 1 percent can be thought of as Capital while the 99 percent can be thought of as Labor. Is the portion of Gross Domestic Product going to labor smaller, relative to capital, than it used to be? Conard insists not, citing some figures from the Federal Reserve Bank of St. Louis. I recognize that there are differing ways to measure labor share versus capital share, but I tend to believe studies (unmentioned in Conard's book) that say labor share has declined. One of them, after all, was produced by the chief investment officer at JP Morgan Chase, which has every reason to pretend otherwise. In a July 2011 newsletter for Morgan clients, Michael Cembalest wrote, "U.S. labor compensation is now at a 50-year low relative to both company sales and U.S. GDP." From 2000 to 2007, Cembalest calculated, pretax profits for the Standard & Poor's 500 increased by 1.3 percent. Reductions in wages and benefits accounted for about 75 percent of that increase.

I could go on, but I won't. Conard is certainly right that a capitalist economy needs some income inequality in order to function. Effort and skill must be rewarded. The question is whether the U.S. needs to have so much more than it used to have, and so much more than other advanced industrialized economies have. Most especially we need to ask why income inequality must accelerate much more rapidly in the U.S. than elsewhere. Conard doesn't want to face these questions head-on, because he has a simpler brief. He wants America to reward even more than it does now the brave souls who put capital at risk. Never mind that at Bain Capital, Conard's former place of employment, capital was often invested with no downside risk at all. If America can't prosper while the top 1 percent doubles its income share, you have to wonder whether the problem really can be that these guys have too little cash to play with. I'm inclined to think it's because they have too much.